Country briefing note <download pdf file>
Strong growth continues on the back of domestic demand
- Strong and sizeable domestic demand has helped the economy to weather the global downturn more resiliently than most other regional peers. The economy expanded at 6.2% in 2012, after recording a 6.5% growth rate in 2011, the fastest pace in 14 years.
- The contribution of private consumption to quarterly GDP growth increased steadily over the year, underpinned by a tight labour market, stable inflation and thus consumer optimism.
- The contribution of gross fixed capital formation was also buoyant. The fixed investment-to-GDP ratio continued its upward trend in 2012 as a result of improved macroeconomic fundamentals, currently about a quarter of GDP.
- In contrast, exports of goods and services held back growth, especially in the second half of 2012 when shipments declined.
- On the supply side, a solid expansion in the services sector helped to offset softer manufacturing activities.
- The economy is projected to enjoy a robust growth of 6.6% in 2013. Domestic demand should continue to be the main growth driver, as exports will likely remain sluggish. In addition to uncertainty in advanced economies, the extent of China 's slowdown and its implications for demand and the price of Indonesia 's commodity exports are important issues. Managing the volatility of capital flow will be another important factor, given the sizable portion of local currency debt held by foreign investors.
Inflation softens but prospect sensitive to administrative prices
- Average annual inflation rate softened from 5.4% in 2011 to 4.3% in 2012, as food and fuel price increases moderated. Despite strong domestic demand, inflation was comfortably within the official target range.
- However, the price prospect is highly sensitive to possible changes in administrative prices; for instance, the budget for 2013 proposes a 15% increase in electricity prices.
Fiscal deficit widens owing to fuel subsidies
- Fiscal deficit as a ratio of GDP widened from 1.4% in 2011 to 1.8% in 2012, partly because of subsidies on fuel and electricity, which exceeded their target.
- The minimum level of taxable income was raised to support consumer spending.
- In mid-2012, the Government announced additional capital spending of 0.3% of GDP, mainly to enhance lagging public infrastructure. It plans to boost infrastructure spending by 15% in 2013, although underspending has been observed in previous years.
Monetary policy is generally supportive of growth
- The central bank resumed policy interest rate cuts in late 2011 and early 2012 but has since left it unchanged amid strong domestic demand. Still, the level of 5.75% as of 1 April 2013 is lower than the trough recorded during the peak of the global financial crisis.
- While the banking sector remained generally healthy, the central bank used various macroprudential measures to ensure financial stability. For instance, a more stringent rule on down payments was announced in mid-2012 to slow credit growth for the purchase of housing and automobiles.
Current account deficit widens
- The current account balance turned from a surplus of 2% of GDP in 2009 into a deficit of 2.8% of GDP in 2012 owing to subdued exports, strong domestic demand and increases in fuel imports and prices. To cope with lacklustre shipments, the Government announced various measures including an effort to stabilise the rupiah currency and ensure access to trade finance.
- Foreign direct investment inflows continued to strengthen because of the country's dynamic investment climate and growth potential. On the other hand, portfolio inflows were relatively stable compared to regional peers, amid the quantitative easing in advanced economies. Bucking the trend of currencies of regional peers, the rupiah weakened by some 8% in 2012, amid concerns over current account deficit.
Addressing development challenges
- Employment continued to growth, at 1.4% in 2012, slower compared with 3.6% in 2011. However, informal employment as a share of non-agricultural employment remained high at 72.5%. As many as one in four youth were neither in education nor employment, with the share much higher among young women.
- The Government is promoting various employment-related schemes. At the same time, Indonesia passed legislation in 2011 to make health insurance universal in 2014.
- Environmental sustainability has gained increased attention. The Government has laid out eight priorities for sustainable growth, with green jobs as an overarching theme: renewable energy; low carbon transport; energy efficient buildings; clean technology; improved waste management; improved freshwater provision; sustainable agriculture and forest management; and sustainable fisheries. To this end, the finance ministry has identified economic instruments such as environmental tax and green budgeting, while the central bank has included environmental performance in bank credit policy.